Legal Aid: A Blog About Laws And Legal Processes

Save yourself from tenant risk by adopting an estoppel agreement

29 June 2016

Renee Bates

When you plan to buy an investment property, it's logical to run the numbers by computing the expected return as well as evaluating the probable risk. When you want to buy a piece of real estate with existing occupants, the occupants themselves are one of the risk factors. While some occupants are prompt in making rental payments, some actually never pay. So how can you lower your exposure to this form of tenant risk? The solution is to adopt an estoppel agreement.

What is an estoppel agreement?

This is a document that spells out the nature of the association between the property owner and tenant. This document informs any potential buyer of real estate about the rights of current tenants. It explains to you what you're actually getting into beforehand. What that means to potential rental property buyers is they get the existing tenants to substantiate things on the front end prior to completing the transaction process by filling out the estoppel agreement, hence avoiding a scenario where the tenants claim contrasting circumstances later on.

What's contained in an estoppel agreement?

Basically, an estoppel agreement ought to recap the terms and conditions of the lease presently in effect, but at the very least should indicate the following:

• The names of all occupants and tenants in the rental property
• Lease term including both start and expiration dates
• The rental amount and when it's due
• Who pays utilities
• Security deposit amount
• Who takes care of the repairs and maintenance
• Any other oral agreements in place with the property owner

All the tenants must fill out the estoppel agreement form, and both the seller as well as the tenants must append their signatures on the agreement before you close the transaction. This is arguably one of the most important steps for any potential rental property in their due diligence checklist.

What's the importance of an estoppel agreement?

By having the existing tenants fill out and sign an estoppel agreement, you now have a legal certificate that will stop any tenant from claiming anything against you once the property transaction is closed. For instance, a tenant can claim that they paid 5 months rent in advance or that their security deposit was $2,000 not $1000. Such fraudulent claims can now be disproved using an estoppel agreement.

In conclusion, potential rental property buyers should protect their investment and lower the risk posed by existing tenants by adopting an estoppel agreement. Understand what you're plunging yourself into and protect yourself from future nightmare.

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